Under FRS 102 Section 9, a parent must consolidate every entity it controls, where control means the power to govern an entity’s financial and operating policies so as to obtain benefits from its activities. Consolidation adds the group’s accounts together line by line, removes the parent’s investment and all intragroup balances and profits, and shows the minority shareholders’ share separately. A subsidiary can be left out only on narrow grounds: severe long term restrictions, being held exclusively for resale, or being immaterial.

When does a parent have to prepare group accounts?

Section 399(2) of the Companies Act 2006 says that if a company is a parent company at the end of a financial year, its directors must prepare group accounts as well as individual accounts, unless the company is exempt. FRS 102 paragraph 9.2 adds that a parent only needs to prepare consolidated accounts under the Act if it is a parent at the reporting date.

The main exemptions are:

  • Small groups. Section 399(2A) exempts a parent subject to the small companies regime, unless the group includes a company with securities traded on a UK regulated market, a bank or an insurer. FRS 102 paragraph 1A.21 confirms a small parent is not required to consolidate, and paragraph 1A.22 says that if it chooses to, it must follow the Section 9 procedures.
  • Intermediate parents. Sections 400 and 401 exempt a parent that is itself included in the consolidated accounts of a larger group, subject to conditions. FRS 102 paragraph 9.3 summarises the shareholding tests: wholly owned; at least 90% owned with the other shareholders approving; or more than 50% owned with no notice requesting group accounts served by holders of at least 5% of the shares. The exemption is not available if the company’s securities are traded on a UK regulated market.
  • No subsidiaries need be consolidated. Section 402 exempts a parent whose subsidiaries could all be excluded from consolidation.

Section 399(4) allows an exempt company to prepare group accounts voluntarily, which lenders sometimes ask for.

How does control decide whether an entity is a subsidiary?

Paragraph 9.4 defines a subsidiary as an entity controlled by the parent, and control as the power to govern its financial and operating policies so as to obtain benefits from its activities. Paragraph 9.5 presumes control where the parent owns, directly or through subsidiaries, more than half of the voting power. The presumption can be rebutted only in exceptional circumstances where it is clearly shown that the holding does not give control.

Control can also exist with half or fewer of the votes where the parent has:

  • power over more than half of the voting rights through an agreement with other investors;
  • power to govern the financial and operating policies under a statute or agreement;
  • power to appoint or remove a majority of the board, where the board controls the entity; or
  • power to cast the majority of votes at board meetings, where the board controls the entity.

Paragraph 9.6 extends this to options or convertible instruments that are currently exercisable, and to control exercised through an agent. Paragraph 9.6A brings in the company law tests: control exists where the parent has the power to exercise, or actually exercises, dominant influence or control, or where the two are managed on a unified basis. These mirror section 1162 of the Companies Act 2006, which defines parent and subsidiary undertakings by reference to majority voting rights, board control, dominant influence under the articles or a control contract, control of votes under a shareholder agreement, and actual dominant influence or unified management.

Paragraphs 9.10 and 9.11 apply the same thinking to special purpose entities, such as a trust holding shares for an employee scheme. A parent must consolidate an SPE it controls, and indicators include the SPE’s activities being run for the parent’s business needs and the parent having the majority of the benefits or residual risks.

How is consolidation carried out?

Paragraph 9.13 treats the group as a single reporting entity. The steps are:

  1. Combine the parent’s and subsidiaries’ accounts line by line, adding together like assets, liabilities, equity, income and expenses.
  2. Eliminate the parent’s investment in each subsidiary against the parent’s share of that subsidiary’s equity, with the acquisition accounting following Section 19 Business Combinations and Goodwill.
  3. Eliminate intragroup balances, transactions, income, expenses and dividends in full, and eliminate in full any profit or loss on intragroup sales still held in assets such as stock or fixed assets (paragraph 9.15).
  4. Measure and present the non controlling interest in profit or loss and in net assets separately from the parent’s shareholders (paragraphs 9.13(c) and (d), 9.20 and 9.21).

Paragraph 9.16 requires the same reporting date and period for all group members unless impracticable. Where a subsidiary’s year end differs, the group may use its last accounts if they end no more than three months before the parent’s, adjusted for significant transactions in between, or use interim accounts made up to the parent’s date. Paragraph 9.17 requires uniform accounting policies, so a subsidiary using a different policy is adjusted on consolidation. Paragraph 9.22 attributes total comprehensive income between the parent and non controlling interest even if that leaves the non controlling interest in deficit.

What does a consolidation adjustment look like?

Illustration only. Parent owns 80% of Sub. Sub’s profit for the year is £100,000. During the year Parent sold goods to Sub for £50,000 that had cost Parent £40,000, and half of them are still in Sub’s stock at the year end.

  • Group turnover and cost of sales are both reduced by £50,000, because the group has not sold anything to an outside customer on that transaction.
  • The unrealised profit in closing stock is half of £10,000, so £5,000 is removed from group stock and from group profit.
  • The non controlling interest’s share of Sub’s profit, £20,000, is shown separately on the face of the profit and loss account. Because the unrealised profit arose in Parent, none of the £5,000 adjustment is charged to the non controlling interest.

When is a subsidiary excluded from consolidation?

FRS 102 is stricter than the Companies Act here. Section 405 of the Act allows exclusion where the subsidiary is immaterial, where severe long term restrictions hinder the parent’s rights, where in extremely rare circumstances the information cannot be obtained without disproportionate expense or undue delay, or where the interest is held exclusively for resale. FRS 102 narrows this:

  • Paragraph 9.9 requires exclusion where severe long term restrictions substantially hinder the parent’s rights over the subsidiary’s assets or management, or where the interest is held exclusively with a view to resale and the subsidiary has not previously been consolidated.
  • Paragraph 9.9A permits exclusion where the subsidiary is not material, but two or more may be excluded only if they are not material taken together.
  • Paragraph 9.8A says a subsidiary is not excluded because the information cannot be obtained without disproportionate expense or undue delay, and paragraph 9.8 says dissimilar activities are not a reason either.

Excluded subsidiaries are still accounted for. Under paragraphs 9.9B and 9.9C, a restricted subsidiary is measured using the parent’s investment policy, or as an associate if significant influence remains, and one held for resale as part of an investment portfolio is measured at fair value through profit or loss. Paragraph 9.23(e) requires the name of any excluded subsidiary and the reason to be disclosed.

What happens when the parent’s stake changes?

  • Losing control. Paragraph 9.18A recognises a gain or loss in the group accounts equal to the proceeds less the share of net assets, including goodwill, disposed of. Any remaining holding becomes an associate, joint venture or simple investment under paragraph 9.19.
  • Selling part but keeping control. Paragraph 9.19A treats this as a transaction between equity holders: no gain or loss is recognised, and the difference goes directly to equity under paragraph 9.20A.
  • Buying more of a subsidiary already controlled. Paragraphs 9.19C and 9.19D say the net assets are not revalued, no extra goodwill arises and the transaction is again recorded in equity.

What goes in the parent’s own accounts?

Separate financial statements are the parent’s own accounts in which investments in subsidiaries, associates and joint ventures are carried at cost or fair value rather than on the basis of their results and net assets (paragraph 9.24). Paragraph 9.26 lets the parent choose cost less impairment, fair value through other comprehensive income, or fair value through profit or loss, applied consistently to each class of investment. Paragraph 9.26A applies the same choice to an exempt parent whose separate accounts are its only accounts.

Where group accounts are prepared, section 408 of the Companies Act 2006 lets the parent omit its own profit and loss account from the published annual accounts, provided the accounts disclose that the exemption applies. The individual profit and loss account must still be approved by the directors.

Does consolidation change how the group is taxed?

No. HMRC’s Company Taxation Manual at CTM80105 explains that group relief lets losses move between group companies but stops short of treating the group as a single company: each company remains a separate entity for tax. Corporation tax is computed company by company from each company’s own accounts, not from the consolidated accounts. See group relief and associated companies for the tax rules that do look across the group, and audit exemption for small companies for how group membership affects audit.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.